Don’t blame export woes on strong Canadian dollar: BOC

(Reuters) — Canada cannot devalue its way to prosperity or blame weak export levels solely on the strong Canadian dollar, the head of the Bank of Canada said on Aug. 22.

Speaking to an auto union that blames the strong dollar to higher costs for automakers, Governor Mark Carney noted Canada's export performance over the last decade has been the second-worst in the G20 grouping of major and emerging nations.

"Some blame this on the persistent strength of the Canadian dollar. While there is some truth in that, it is not the most important reason," he told the Canadian Auto Workers (CAW), describing over-exposure to the mature and sluggish market in the United States as a more important factor.

The CAW has been a tough critic of the strong Canadian dollar, arguing it inflates the cost of making cars in Canada. The union launches talks with the Detroit Three car companies later this year and will be seeking a share in the firms' newfound profitability.

Carney said the Bank of Canada watches the dollar's level as it sets monetary policy, but said a dramatic shift in the currency's value might not have as much of an impact as some could expect.

Noting interest rates remain very low, he defended the bank's repeated statements that it would eventually need to remove stimulus from the economy, which means raising interest rates. But recovery from the global economic malaise would not be easy, he added.

"This is not a normal recovery and expansion, and we have fundamental challenges. This is going to be a long slog," he said at a news conference after the speech.

Carney also noted that weak foreign demand and challenges such as the strong dollar mean exports are likely to remain below their pre-recession peak until the start of 2014.

He said Canada should focus on exporting to faster-growing emerging nations, while firms need to improve the skills of workers and take advantage of new technology.

"We cannot devalue ourselves to prosperity or cut ourselves off from the world and hope to rely on ever-increasing borrowing by Canadian consumers," he said in the speech.

Near-record low interest rates have persuaded Canadians to borrow heavily against the value of their property, driving borrowing to record levels, and Carney noted there were signs of overbuilding and overvaluation in some parts of the real estate market.

Carney has taken a more hawkish line than most central bankers, noting the Canadian economy's underlying momentum was roughly in line with the potential that it has to grow.